Applying For a Personal Loan? Here’s Everything You Need to Know
In our lives, numerous circumstances can arise wherein we require additional cash. For some, it so happens that after living in a home for some time they feel the need to make certain repairs and renovations. In other cases, there may be wedding arrangements that need to be made or a plan for a holiday underway. But in some unfortunate situation, funds may also be required for a medical emergency.
For all these cases personal loans remain a good option. Various banks and financial institutions in India offer personal loans to applicants. Here are some of the things you need to know about applying for a personal loan:
Types of Personal Loan
A personal loan can be classified into two categories – secured or an unsecured. In the case of a secured loan, the borrower needs to give some collateral against the loan amount. This may be in the form of some asset such as a house, gold, and so on.
Note that if the borrower is unable to pay back the loan amount, the bank has the right to take possession of the borrower’s collateral.
However, in the case of an unsecured loan, there is no collateral given against the loan amount. Consequently, banks are in a higher risk situation on giving a loan to the applicant. This is why the rate of interest for an unsecured loan is higher than that for a secured loan. Because this helps the lender get back the maximum amount from a borrower and lowers their risk.
Your Credit Score
Your credit/CIBIL score can be very important while applying for a loan. It is calculated by the CIBIL authority based on your financial record that it gets from various banking and financial institutions.
Based on this data it calculates your credit score which determines your credit worthiness and personal loan eligibility. That is, this number indicates to any potential lender how likely it is that you’ll make the loan payments on time. In case you have a history of making timely payments, this score will be higher. But if you have a record of defaulting on loans, the score can fall.
In general, a CIBIL score of 750 or above is required to be eligible for a personal loan. For a score of 600 to 749, the loan request may yet be considered due to other factors such as the applicant’s sources of income, employment details and so on.
If you currently do not have a credit score of 750, it is highly advisable that you first improve upon this score before applying for a personal loan.
The benefit of taking a personal loan is that involves minimal documentation and the process can be hassle-free. Here is a general list of documents that you’ll require:
- Filled application form
- Identity proof
- Residential address
- Financial/Income documents required for resident Indian
It can also be possible for you to apply for a personal loan online. By going through the websites of different banks and comparing their offers you can choose what best serves your needs.
It is worth noting that you cannot avail a tax deduction on a personal loan. However, if the loan has been taken for home renovation purposes, you can claim a tax deduction as per section 24b of the Income Tax Act. But if the loan has been taken to buy a car or for other personal reasons, then the tax on the same remains payable.
Thus various factors affect your choice of applying for a personal loan. It is important to properly evaluate all of them and their impact on your finances before taking any decision.